GUEST POST: American Firms are Offshoring Innovation. Here’s How to Reverse the Trend.

Jul 31 2018 |
A Marine makes adjustments to a 3D printer before loading a design during a class at Marine Corps Base Camp Lejeune, N.C. | Photo by Department of Defense

“Invent there, manufacture there” is the new mantra for many companies.

The following is a guest post written by Mike Russo, Pramod P. Khargonekar and Glenn Daehn.

This summer, the National Association of Manufacturers (NAM) surveyed its 14,000 members. The news was good: More than 95 percent of American manufacturers now have a positive outlook for their companies. 

But here's the problem:  Short-term optimism says little about our capacity to lead the industries of the future.    

Though tax, trade and regulation policies may enhance competitiveness of existing industries, America's manufacturing innovation ecosystem faces serious challenges. While we’ve already suffered serious losses to the offshoring of production, we’re also increasingly seeing the offshoring of innovation.  

For decades, “invent here, manufacture there” was the mantra for many U.S.-based advanced manufacturing firms. But, today, as many firms invest in innovation overseas, the new trend is: “Invent there, manufacture there.”  

America is losing innovation research and development (R&D) and innovation centers in addition to factories.

In spite of near-term optimism, our challenges run deep. After decades of shifting production offshore to reduce labor costs, we’ve lost many of our basic production skills and capabilities; domestic suppliers are often unable to supply essential parts; and our ability to manufacture new advanced technology products is now seriously constrained.

We need a strategy to strengthen the fundamentals of American manufacturing. We believe that such a plan needs to focus on three pillars: First, we need to rebuild America’s “industrial commons” — our ecosystem of manufacturing expertise and production capacities. Second, we need to ensure we capitalize on US national investments in R&D. Third, we need to secure funding for US manufacturing start-ups and scale-ups to restore domestic production. 

Last month, MForesight — a nonprofit consortium led by representatives from the U.S. manufacturing community that convenes experts from industry, university, and government to forecast and develop recommendations for advanced manufacturing — released its flagship Manufacturing Prosperity report for 2018.  It lays out a comprehensive strategy for addressing these issues. Policymakers should take notice. Our thinking is informed by the wide-ranging discussions that led to this report.

In spite of near-term optimism, our challenges run deep. After decades of shifting production offshore to reduce labor costs, we’ve lost many of our basic production skills and capabilities; domestic suppliers are often unable to supply essential parts; and our ability to manufacture new advanced technology products is now seriously constrained.

On innovation and advanced manufacturing in particular, it’s clear we need a course correction. 

In spite of America’s annual federal R&D investments of more than $140 billion, the nation’s trade deficits in advanced technology products are still around $100 billion. It’s a complex problem with global supply chains and not all sectors registering deficits. But a key issue is clear: overseas competitors are taking advantage of promising results from America’s basic research investments, maturing innovations, producing products, and exporting those products back to the United States.

A related challenge is the breakdown in how the U.S. economy finances start-ups and scale-ups in manufacturing — as well as foreign subsidies and support to nascent overseas manufacturing firms. Venture capital firms are supposed to play a pivotal role in financing new firms with proven technologies, helping to bring good ideas to market and ramp up production to scale.

But America’s venture firms are invest heavily in software  —  which offer quicker returns relative to industrial “hardware” projects. There’s a dearth of financial support to launch or expand America’s next great manufacturing startups.

The new MForesight report demonstrates that these challenges are surmountable.  It recommends four overall steps to strengthen America’s prospects as an industrial power:

  • First, invest in translational research and manufacturing innovation. The world’s leading manufacturing nations spend far larger proportions of their national R&D budgets on bringing good ideas to market. South Korea, for example, spends 30 percent of its R&D budget on industrial production and technology R&D, and Germany spends 12 percent. The US spends just 0.5 percent. The new report puts forward a range of ideas, including new non-profit organizations connected with universities and focused on maturing promising research.  As many leaders in the manufacturing community have emphasized, there’s currently no central “focal point” for manufacturing R&D in the federal government. This could be addressed directly and affordably through the creation of an entity, for example, a manufacturing-focused National Innovation Foundation, to coordinate investments in the industrial ecosystem.
  • Second, encourage pilot production and scale-up for U.S. industry by building on existing resources. The federal government has a history of prudently strengthening industries (think aviation, nuclear power, telecommunications, and the Internet) through a combination of R&D and procurement contracts.  We need to think systematically about how to support US production through these avenues.
  • Third, empower small and medium-sized manufacturers. These firms are rightly recognized as the backbone of American industry. Using many possible tools including: loan guarantees, technical assistance, and industry fellowships that take advantage of the energy of engineering students and expertise of retired engineers, and access to user facilities with next manufacturing generation equipment, policymakers can go a long way in helping these firms upgrade technologies and secure needed expertise
  • Finally, grow domestic engineering and technical talent. Educated people are the ultimate basis of our economic competitiveness. Government can address the growing need for talent by increasing the availability of graduate fellowships for qualified domestic students and taking important steps to formalize apprenticeship programs and enhance vocational training — working with local technical schools to create custom training programs, often with employment guaranteed to successful graduates. Government should also co-invest and provide incentives that encourage public/private partnerships between industry and the education community that increases demand driven education and experiential learning.

There’s no question: It’s worth celebrating rising confidence among manufacturing firms. The short-term future for existing American manufacturing firms seems bright. But we can’t let this be an excuse to avoid serious thinking about a national strategy. We need to focus on creating opportunity for America’s next manufacturing firms — those that will lead in the industries of the future. Other countries are employing the same tactics that the U.S. once employed to build advanced industries.  

Our competitors are taking action in the global contest for advanced manufacturing leadership. It’s our move.
Mike Russo is Director of U.S. Government Affairs for GlobalFoundries and Executive Committee Chair for MForesight. Pramod P. Khargonekar is the Vice Chancellor for Research and Distinguished Professor of Electrical Engineering and Computer Science at the University of California, Irvine. He is a member of the MForesight Executive Committee of MForesight. Glenn Daehn is the Fontana Professor of Materials Science Engineering at the Ohio State University and Director of Manufacturing Initiatives at Ohio State's Institute for Materials Research. He is a member of the MForesight Executive Committee of MForesight.